Chapter 28 Income Taxation Of Trusts And Estates

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Research Problems
Research Problem 1. Grinder Ltd. is an S corporation that is wholly owned by Juan Plowright. Because several of Juan’s ancestors have had Alzheimer’s disease, Juan is transferring many of his assets to trusts, and he is funding living wills in anticipation of future medical issues.
Juan wants to transfer his Grinder stock to a trust, but he wants to keep control over its operations for as long as possible. Thus, he wants to retain a right to revoke the trust, until such time as the trustee (a Grinder executive who is on good terms with Juan) and a medical professional determine that Juan no longer is competent. You have explained to Juan that this entity is a grantor trust and that there are no income-shifting or transfer-tax-saving aspects in using such a trust.
The pertinent tax issues to be addressed are summarized below.
• Does the grantor trust terminate Grinder’s status as an S corporation?
• Will Grinder’s S election survive Juan’s death? Under the terms of Juan’s will, the
S shares will be held by his estate and not be distributed to his niece Beatriz until she reaches age 25.
All parties are residents of New Mexico. Cite and summarize your findings in an outline for a talk that you will deliver next week to your school’s Accounting
Club. Assume that Club members are knowledgeable about the taxation of
S corporations and their shareholders (e.g., from Chapter 22).
Research Problem 2. For three generations, the Dexter family has sent its children to
Private University, preparing them for successful professional careers. The Edna
Dexter Trust was established in the 1950s by LaKeisha’s late grandmother and has accumulated a sizable corpus. It makes distributions to Edna’s descendants rarely, and then only when they need large capital amounts. For example, two years ago, the trust distributed $500,000 to DuJuan Dexter to aid him in starting a practice in retirement and elder law. In most years, the trust’s income is donated to a single charity.
Under the terms of the trust, Bigby Dexter, LaKeisha’s uncle and legal guardian, can specify the trust beneficiaries and the amounts to be distributed to them. He also can replace the trustee and designate the charity that will receive the year’s contribution.
Accordingly, the trust falls under the grantor trust rules of § 678, and Bigby reports the trust’s transactions on his own Form 1040.
LaKeisha wants to attend the prestigious local Academy High School, which will require a four-year expenditure for tuition and fees of $100,000, payable in advance.
She approaches the Edna Dexter trustee and requests a current-year distribution of this amount, payable directly to the Academy. Under the laws of the state, the parent or guardian has the responsibility to provide a child with a public school education (no tuition charge) until age 16.
If the payment to the Academy is made, how is it treated under the Subchapter J rules: as a charitable contribution to the Academy, as a corpus distribution to
LaKeisha, or in some other manner?
See Appendix E for Comprehensive Tax Return Problem—Form 1041
Research Problem 3. How many estates filed a Form 1041 last year? Simple trusts?
Complex trusts? Grantor trusts? How much Federal income tax has been collected on
Forms 1041 over the last three tax years? Summarize your findings in a series of graphs to share with your classmates.
Research Problem 4. Under the income tax laws of your state applicable to fiduciaries, how are the following items allocated among the entity and the beneficiaries?
Put your findings in a PowerPoint presentation for your classmates. Hint: Use the
CCH, RIA, or other online tax research service to find this information.
• Capital gain.
• Cost recovery.
• Fiduciary fees.
• Exempt interest income.
• AMT adjustments.
• General business credits.
Research Problem 5. Create no more than three PowerPoint slides, summarizing your state’s definitions of and rules for using the following terms. Hint: Your state might not use these terms at all, or it might use a term that differs slightly; so make sure your Internet research is broad enough to find the equivalent terminology.
• Living will.
• Living trust.
• Health care power of attorney.
• Durable power of attorney.
Roger CPA Review Questions
1. On February 14 this year, Charlie Crooker created Charlie’s Trust for the benefit of his children. During the year, the assets within the trust earned income of $12,000.
What is the amount of the standard deduction available to Charlie’s Trust when filing its fiduciary income tax return?
a. $600
b. $300
c. $100
d. $0
2. Don Donovan, a U.S. citizen, died on April 1 this year. In computing the estate’s taxable income for the year, the executor of Don Donovan’s estate could claim a charitable contribution deduction if which of the following is (are) true?
I. The recipient of the charitable contribution is a qualified charitable organization.
II. Don Donovan’s will specifically provided for the contribution.
III. Charitable contributions must be paid from amounts included in the estate’s gross income from the year of contribution or from funds permanently set aside for such contributions.
a. All of the above
b. I and II, but not III
c. II and III, but not I
d. II only
Use the tax resources of the Internet to address the following questions. Do not restrict your search to the Web, but include a review of newsgroups and general reference materials, practitioner sites and resources, primary sources of the tax law, chat rooms and discussion groups, and other opportunities.
Internet
Activity
3. Patrick, a cash basis taxpayer, died on February 3 of this year. Through the end of the year, the estate’s executor made cash distributions of $1,500 to Patrick’s brother, the sole heir of the estate. The following is additional information related to Patrick’s estate.
Estate Income $7,500 Taxable rental income $8,000 Taxable interest
Estate Disbursements $2,500 Charitable contributions from gross income to a public charity, made under the terms of the will.
What was the estate’s distributable net income (DNI) for the year?
a. $15,500
b. $13,000
c. $11,500
d. $5,000
4. Which of the following conditions must be true for a trust to be a simple trust?
I. The trust distributes all of its income to delegated beneficiaries every five years.
II. The trust distributes all of its trust corpus (principal) every five years.
III. The trust has 10 or fewer beneficiaries.
IV. The trust has no beneficiaries that are qualifying charitable organizations.
a. All of the above
b. III only
c. IV only
d. None of the above